S&P 500 Futures, Treasury bond yields pause SVB-induced moves on Fed concerns, US inflation eyed

The risk profile remains mildly positive during early Tuesday, following a volatile day that caused the bond market havoc amid fears of a financial crisis. That said, the sentiment also improves as hawkish Fed bets and inflation expectations retreat ahead of the key US Consumer Price Index (CPI) data for February.

While portraying the mood, the S&P 500 Futures prod the three-day downtrend while posting mild gains around 3,900, bouncing off the lowest levels since early January marked the previous day. On the same line, the US 10-year Treasury bond yields seesaw around 3.56%, after bouncing off the monthly bottom of 3.418%, whereas the two-year counterpart rebounds from the lowest levels since September 2022 to print mild gains of around 4.05% by the press time. It should be noted that the US two-year Treasury bond yields dropped the most since 1987 the previous day while the latest rebound could be a U-turn from the 200-DMA support ahead of important US data.

Global markets witnessed heavy bond buying the previous day as the US banking regulators rushed to defend the Silicon Valley Bank (SVB) and the Signature Bank after their fallouts. US banking regulators undertook joint actions to tame the risks emanating from SVB and Signature Bank during the weekend.  While announcing the plan, US President Joe Biden noted on Monday that investors in those banks will not be protected and reminded that "no one is above the law." However, the US President also vowed to take whatever action was needed to ensure the safety of the US banking system, per Reuters.

It should be noted that the policymakers from the UK and Europe, as well as some of the Asia-Pacific majors, have ruled out the odds of witnessing a financial crisis at home after the SVB saga, which in turn might have allowed the traders to pare the previous day’s market moves.

Apart from consolidating the previous day’s moves, as well as positioning themselves for the key US data, the recent retreat in the US Treasury bond buying and the hawkish Fed bets also allows the market sentiment to improve. Earlier in the day, “the US Fed Fund Futures have priced in a 69% chance of a 25-bps hike at next week's Fed policy meeting, with a more than 30% probability of a pause” said Reuters while also adding that the market last week was poised for a 50-bps increase prior to the SVB collapse. On the same line could be the CME as it mentioned, “Traders see 33% chance Fed holds rates this month, market pricing shows rate cuts expected as early as June.”

It should be noted that the slump in the US inflation expectations also favors consolidation of Monday’s moves. The US inflation expectations per the 10-year and 5-year breakeven inflation rates from the St. Louis Federal Reserve (FRED) dropped to the lowest levels since early February. In doing so, the inflation precursors dropped for the consecutive fifth and sixth days for the five-year and 10-year gauges respectively.

Moving forward, the US CPI will be important for intraday directions but major attention should be given to the risk catalysts and the yields. That said, the US CPI is likely to ease to 6.0% YoY versus 6.4% prior while CPI ex Food & Energy may slide to 5.5% YoY from 5.6% prior.

Also read: Forex Today: Dollar extends slide as markets reconsider Fed’s next move